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Tax incidence determines which group ultimately pays a tax, with the burden often passed on through economic layers. The true payer of the tax is usually the group that pays the most, which can be the retailer or customer for commercial products. However, in some cases, such as with perishable goods or local taxes, the tax incidence may occur earlier in the chain.
In some circumstances, it is possible to pass the cost of a tax on to another group; The tax incidence establishes which group actually pays a tax. This process follows a tax from its origin through all economic layers to the final payer. In many cases, it is a person who has several steps removed from the actual tax and who carries the greatest burden.
While it may seem that the person paying the tax would bear the tax burden, this is not always the case. Certain taxes are levied against a particular group, but instead of paying those taxes, you transfer them to another group. A person who pays the actual tax, the one who fills out the forms, pays a nominal tax incidence. This form of tax incidence is rarely the last step in the process.
In general, a person passes his expenses on to others whenever possible. If a manufacturer is taxed, the additional cost is passed on to them by increasing the price. If the company that uses the products for a finished product needs to pay more, it increases the price. The products will then go to a retailer who is suddenly paying more for a stocked product. The retailer will either accept the price increase or pass it on to its customers.
Each of these steps is a separate link in a chain. Although the initial person had a nominal tax incidence, they were only the first link. Each location, including the first one, is likely to pay a small amount of the tax. Even so, one group almost always pays the most. This group is the true payer of the tax.
In general, the tax on a commercial product reaches a retailer or a customer. Manufacturers and suppliers increase the cost of their portion of the product to account for the new price. A retailer must determine if its customers will buy the product at a higher cost; if they don’t, then the retailer pays the tax. If the retailer feels that people will still buy the higher priced product, then the customer pays for it.
This drip system is not always in action. In circumstances where the product is available from many sources, the tax is local, or the good is seasonal or perishable, the tax incidence will occur later in the chain. For example, if a person grows oranges and the county government levies a tax on oranges, the grower may have to pay the tax alone. Since oranges can come from many places and not all have the tax, the grower would need to keep their prices low to remain competitive. Since the commodity is perishable, the grower cannot afford to store oranges until prices equalize.
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